The three Methods of Business Valuation

1. Public Company Comparatives or “Comps” which is the comparison of similar company or business and their value are on the market.

2. Precedent Transaction is focusing on similar type of businesses and industries in which the price paid for companies is pursued as an index of a company’s value.Precedent is also known as “M&A comps” due to the fact that it involves passed M&A transactions.

3. Discounted Cash Flow or “DCF” is a stand-alone valuation because it is not related to other businesses. It consists of discounted future flow in order to determine the value of a company.

Enterprise Value

Enterprise Value is defined as the aggregate value of a business considering it capital structure. It includes the Equity Value and the Net Debt. Enterprise Value is compare to EBIT, EBITDA, Sales or Revenues because there are no consideration to any debts.

EBIT= Earning Before Interest and Taxes.

EBITDA or Operating Income= Earning Before Interest and Taxes, Depreciation and Amortization.

Enterprise Value= Equity Value - Cash + Debt

Equity Value

Equity Value metrics are P/E, P/B, P/CF. They are all including consideration to debt due to the fact that these metrics are all after Interest expenses. http://img.wikinut.com/img/i7g141fpi4v5ye20/jpeg/100x100/preview.jpeg

Equity Value or Market Capitalization= Enterprise Value + Cash - Debt

Market Cap= Stock Price x # of Shares outstanding

DCF Growing Perpetuity

By using the DCF growing perpetuity formula, we can unlock the drivers of value.

This formula is really important because by applying growing perpetuity formula to a business that is performing well, your business will be overvalued forever.However, by applying it to a business that is not performing well, your business will be undervalued forever.

FCF refers to Free Cash Flow. It is driven by sales and marketing, business strategy, competitive advantage, cost structure…

Growth “g” is driven by questioning: What is the sustainable organic growth rate? When would has it reached maturity? Has it already?

Cost of Capital is driven by risk, current capital, macro factors…

Example: Supposing that a company has a cost of debt after tax of 4.5%, a cost of equity of 8%. The debt is 63 billion, the equity is 175 billion. Therefore, the asset is 238 billion.What is the Cost of Capital?

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Meet the author

N’golo Ali KoulibalyMy name is N’golo Ali Koulibaly, and I am from Côte d'Ivoire located in West Africa. I was born on august 28th, 1992. I will focus my researches in finance especially Corporate Finance.